Today’s US employment report showed that the unemployment rate had once again crept higher by 1/10th and now stands at 9.2%.  The headline jobs number of +18,000 (with last month revised down to +25,000) compares badly with average job growth of over 200,000 during the Spring.  Buried in the detail was news that average hourly earnings actually fell last month (albeit by only 2 cents to $19.41) which means that earnings are not keeping pace with inflation and consumers are therefore seeing a fall in real wages.

The US economy is clearly going through a slow patch and the worry at the Fed must be that there is a risk of a slide back into a double-dip recession.  Growth in excess of 3% is needed to bring down the unemployment rate and the Fed itself is only predicting 2011 GDP of 2.8%.  The US administration is trying to do its bit to stimulate growth by lowering the price of oil (having successfully cajoled the IEA into co-ordinating a release of 60 mln barrels of strategic reserves) and the States have the Saudis onside too (who are reported to want oil prices in the $70-$80 range rather than the current $100 region).

Yesterday’s profit’s warning from Premier Farnell (PFL) provided confirmation that the global economy has experienced a rapid slowdown during the last six weeks of Q2 2011.  Premier Farnell distribute products to a very wide range of customers world-wide and if activity slows they are amongst the first to feel it (along with their competitor Electrocomponents – watch out for a profit’s warning soon from ECM too).  PFL said yesterday that year-on-year sales during June 2011 were essentially flat (+1.4%) and “this performance reflects a marked moderation of growth rates in all global markets during June, particularly in Europe and North America”.  They went on to comment that “it is now apparent that significant inventory purchases were made in April and early May by industrial and technology customers…following the Japanese earthquake”.  In plain English manufacturers were worried that they would have problems securing supplies following the Sendai earthquake so they went out and panic-bought supplies which they are now slowly using up.  In economics this is called a short-term boost to GDP caused by an inventory bounce.

This will make for an interesting debate at the next Fomc meeting on August 8th.  With QE2 now over and QE3 off the agenda due to inflation having moved up recently, the Fed is almost all out of bullets.  The only option they are left with is to explicitly promise to keep the Fed Funds rate near zero for a long specified period of time and hope that this stimulates growth via lower bond yields.  At best the economy seems to be going through a slow patch but unless some evidence of stronger growth appears soon then the stockmarket is going to start to worry about a double-dip recession and stockmarket indices will trend significantly lower.  Sensible long-term investors should be battening down the hatches now.  Avoid sectors directly linked to global growth, e.g. miners.